Anti-Corruption Compliance — Private Equity Portfolio Companies

Last year, the Securities and Exchange Commission (SEC) sent shock waves through the securities industry when it issued inquiry letters to financial institutions, and private equity and hedge funds focusing on anti-corruption compliance.

This year, Richard Alderman, the Director of the Serious Fraud Office in the United Kingdom, increased industry concern when he gave a series of speeches outlining the enforcement focus of the SFO against the private equity industry.

Private equity companies would have to be deaf to ignore the warnings. The message is unmistakable and clear — private equity companies are at risk for enforcement. Luckily there is time for for private equity companies to get their house in order.

The first and most important area for private equity companies to examine is portfolio companies. At the top of the list are those portfolio companies controlled by the private equity fund.

Private equity companies live and die based on the acquisition and sale of portfolio companies. To buy and sell companies, anti-corruption compliance is critical. Deals will be delayed, renegotiated or even scraped when a portfolio company does not comply with anti-corruption laws.

Portfolio companies need to be ranked based on a basic risk assessment. The high-risk companies should be reviewed quickly for anti-corruption compliance and a plan of action should be designed and implemented. The compliance program has to satisfy a due diligence review and potential lender and/or investor review. Even if not completed, a compliance plan should help to ensure marketability of the company.

For each company, a priority list for compliance tasks has to be developed based on available resources and timing. Unfortunately, portfolio companies do not have the luxury of time, and in some cases may have to choose easier solutions which may not be as effective in the long run. In this environment, compliance solutions will look different than those companies committed to long-term complaince programs.